Education Loan Repayment Strategies to Reduce Interest

Choose a Repayment tenure that matches your Income

EMI and total interest costs vary directly with the tenure of the loan. With a shorter tenure, the overall interest outgo will be less, but the EMI is higher. The longer one stays on the loan the lower the monthly payment will be, but the longer one pays interest.

Graduates need to, therefore, consider tenure when deciding on a loan because of the amount of expected income, financial responsibilities, and regular payments.

If a person is going into a relatively stable job with good pay, then a shorter term could be a possibility. A grad starting his career with an uncertain income, though, might require more flexibility in his monthly checking account.

The goal should not just be to choose the shortest of all the terms. Rather, if the borrower chooses to select a repayment schedule, they need to be able to stick to that plan and have enough funds for necessary expenditures and savings for emergencies.

Use salary increments to increase EMI Payments

A practical approach is to have higher EMI payments in proportion to one's earning level. The starting salary is likely to be at the entry-level and can increase over the next few years as result of increments or promotions.

Rather than using the entire increase in disposable income to fund lifestyle, borrowers can save a portion of every increase in their salary to pay down the loan.

If the borrower's income increases greatly after 2 years, increasing the monthly loan payment can help speed up the reduction of the loan principal. Interest is paid on the remaining balance, so paying off the principal early can save on interest charges for the remaining period of the loan.

Borrowers must verify from their lender if they would be allowed to increase the EMI in the loan or if they would have to make separate part-prepayments.

Make Part-Prepayments when you have Surplus Funds

In part prepayment, the borrower pays a larger sum than the EMI towards the remaining loan amount. This may come in handy if a borrower gets a performance bonus, a tax refund, an inheritance, or some other substantial burst of cash.

A borrower can save a portion of the surplus for education loan instead of using the surplus money for discretionary expenditure.

How the lender adjusts the account and what are the loan terms, will determine the impact of a prepayment. Borrowers need to verify whether the extra payment brings down the loan amount and if it is an option to choose between reducing the EMIs or to extend the tenure.

The purpose is to minimize the total interest outgo, then reducing the principal outstanding and keeping the equated monthly installments within a manageable range could help in the speed of repayment.

“Education loans have made higher education possible for many students whose families couldn't pay the fees upfront. But families should treat the loan as an investment and ask what it will really cost to repay, how long the moratorium runs, and where the programme leads.

Not every student starts from the same place. A first-generation learner may have no one at home who has ever dealt with a bank. Students from reserved categories often have the marks but not the collateral. And families are still more reluctant to borrow for a daughter's education.

The hardest cases often come later. A student from a very poor family takes the loan, finds the coursework tough, and has to repeat the first year. Paying for that extra year can break a family. Our programmes are rigorous, as they should be, but they rarely make room for gaps in earlier schooling.

Lenders could keep the paperwork simple, make collateral-free loans easier to get, and counsel students before they sign. Institutions should publish honest placement data, run bridge courses, and help fund a repeat year. A loan should never be the only way in, or the only way through,” says Dr. Seema Singh Rawat, Professor, Institute of Rural Management Anand Dean School of Innovation and Entrepreneurship, Tribhuvan  Sahkari University